ECOWAS common currency, a mirage or possibility?

Abstract

Unlike previous studies, the current study uses oil price and inflationary shocks to assess the feasibility of actualizing the ECOWAS Vision 2020, which is aimed at creating a monetary union. With the help of the Blanchard and Quah (BQ) decomposition for a sample from 1975:05 to 2018:08, two sets of models are estimated: models for inflationary shocks and models for oil price shocks. It is found that although the vision is a mirage, the creation of a common currency can serve as a shock absorber against the negative spillovers of global and regional inflationary shocks. The study also finds that oil price shocks lead to appreciation of the currency for the oil exporting country Nigeria, while Nigeria, The Gambia and Ghana stand out in their responses to oil price shocks. The study recommends that these countries cannot be part of the Vision and that more coordination among ECOWAS members is needed before this Vision can be actualised.Keywords: Monetary union, Optimal currency area, ECOWAS, WAEMU, SVAR, BQ decomposition.JEL: C13, E31, E52, E58, F33, F42.